USPS demands $394 million from Northrop in contract lawsuit

Nov. 5, 2012 - 04:38PM
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The U.S. Postal Service is demanding almost $400 million from contractor Northrop Grumman in a legal battle over a massive automation project gone awry.

Northrop was supposed to deliver 100 machine systems to sort magazines, large envelopes and other “flats” by October 2010, according to a USPS response last week to Northrop’s lawsuit filed in May. Instead, the “flats sequencing systems” — each about the length of a football field — were not fully deployed until August 2011, costing the Postal Service about $394 million in extra labor costs, according to the filing, which accuses Northrop of breach of contract.

During the negotiations that preceded the 2007 contract award, Northrop claimed that the sequencing systems would “would further reduce the labor necessary to manually sort flats and therefore would yield greater savings to the Postal Service,” the mail carrier’s lawyers wrote in the 74-page document.

For its part, Northrop is seeking about $179 million from the Postal Service for allegedly violating the terms of the fixed-price contract, now worth about $902 million. In the Court of Federal Claims suit, Northrop alleged that postal officials repeatedly imposed design changes that delayed delivery of the machines and drove up costs. According to Northrop, the Postal Service has already withheld some $63 million in contract payments.

In its response, the Postal Service disputes the allegations; its $394 million claim against Northrop, which is based on a USPS contracting officer’s estimate earlier this year, includes that withheld money, according to the agency’s response.

The response, dated Oct. 31, was originally due in July, but the Postal Service won Judge George Miller’s approval for three successive delays on the grounds that it needed more time to prepare.

The dispute has fractured a relationship between Northrop and the Postal Service dating back more than two decades. In its technical proposal for the contract, Northrop said it had supplied “thousands of units of equipment” to the Postal Service since 1989, ranging from biological hazard detection systems to vending machines. Last year, the company was the agency’s third-largest contractor, according to an annual ranking by the law firm Husch Blackwell. Northrop has since decided to de-emphasize the domestic postal automation business, Chief Financial Officer Jim Palmer told stock analysts in an April conference call.